And they lived PEPily ever after

The Fourth Money Laundering Directive is the gift that just keeps on giving, isn’t it?  It’s a meaty document, and one of the delights it has served up – following the recommendation of the FATF’s, well, Recommendations – is an adjustment to the definition of PEPs (Politically Exposed Persons).  It varies slightly from place to place, but in essence a PEP is someone who holds a position of politically authority or influence in a jurisdiction other than your own, and their family and close associates.  The big change is that from 26 June 2017 onwards, we (EU Member States, that is) will have to gaze at our own navels too: “domestic” PEPs will be included, as well as those dastardly foreigners.  But one thing that MLD4 did not tamper with is the length of PEPitude.

In the UK’s Money Laundering Regulations 2007, the definition of a PEP includes the phrase “an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function”.  So this means that once you have been out of that prominent public function for a year, you are de-PEPped, along with your family and close associates.  And this position is supported by MLD4: “Where a politically exposed person is no longer entrusted with a prominent public function by a Member State or a third country, obliged entities shall, for at least 12 months, be required to take into account the continuing risk posed by that person and to apply appropriate and risk-sensitive measures until such time as that person is deemed to pose no further risk specific to politically exposed persons.”

But (ah, you knew there’d be a but) this definition is not universal.  In Guernsey, Jersey and the Isle of Man, for instance, PEPitude is for life, not just for Christmas.  (It may be the same in other jurisdictions, but they’re the ones I know about.)  So if you were an MP in the UK thirty years ago, Guernsey will consider you a PEP until the day you die – and will consider your children and grandchildren PEPs until the days they die.  (But the PEP ripples do not start again with them, unless of course they PEPify in their own right – and of course some professions do tend to run in families, as with the politically active Aitkens, Cavendishes and Churchills.)

Now it’s not our place to change MLD4, but it may be time for renewed debate about PEPs.  They are significant for AML purposes because most jurisdictions state in their legislation that PEPs must be considered high risk, and therefore must be subject to enhanced due diligence.  But with our risk-based approach hats on, what is the most practical and effective way to deal with the money laundering risk posed by these people?  No-one would argue that a current PEP is worthy of a closer look, and few would suggest that taking an interest in them in the year immediately after they leave office is overkill.  But forever?  Personally, I think some sort of compromise would actually be most realistic.  Five years, perhaps, or ten.  I know that their influence can continue – the power behind the throne – and of course money that was dirty forty years ago is still dirty today, but we do have to strike a balance between what is ideal and what is possible.  And to my mind, both approaches (de-PEPping after a year, and never de-PEPping) are unrealistic: in other words, they do not accurately reflect the (average) level of money laundering risk presented by your (average) PEP.

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3 Responses to And they lived PEPily ever after

  1. Tess says:

    Really, as we are (or should be!) grown up professional compliance types you’d think that we would be trusted to take *gasp* a risk based approach on a case by case basis as to whether a PEP was still a PEP.

    • Yes, Dawn and Tess, the compulsory high-risk treatment of PEPs has always been something of a contradiction in a risk-based environment. I’m guessing here (pure guess) but maybe the original intention was to have a publicly available list of PEPs (I do know that they considered and abandoned it when drafting MLD4) which would have been an easy win for MLROs: if they’re on the list, they’re high risk, EDD,job done. And then perhaps the list fell by the wayside, and we have only half the equation. Only a guess, as I say – maybe one of our regulator readers has more of an inside track.
      Best wishes from Susan

  2. DAWN TINDALL says:

    This is a very interesting point you raise Susan – not just the question over the different treatment of PEPs but do we need actually any ‘compulsory’ high risk business relationships at all? I think we do as it takes away the ‘risk-based approach’ for the really risky especially when the wide use of discretion for assessing business relationships as high risk, unfortunately, varies as it does. In Guernsey we have compulsory high risk countries as well as PEPs albeit these countries come and go but PEPs can’t. As with most jurisdictions, the Guernsey regulator is reviewing its Handbook and, hopefully, the PEP approach will be altered although who knows if it will follow the 4MLD? The National Risk Assessments will also, hopefully, help. I’d be interested to know if people prefer certainty rather than the ability to use discretion (documenting it of course) but awaiting the “visit” to find out if they are wrong.

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